From next month, InvestSMART’s Intelligent Investor Australian Equity Growth Fund – Active ETF will be able to invest up to 30 per cent of its net asset value in global shares.
The decision to free up almost a third of its investment arsenal into overseas stocks might not feel consistent with the strategy’s clearly stated Australian equity title, but InvestSMART has underscored that the “best days are behind” for some of the country’s largest growth names.
“Australia is famous for being a wonderful place to invest for income due to our dividend imputation system and the high dividend twin pillars of iron ore majors and banks,” the company’s head of research and portfolio management, Nathan Bell, said in an ASX announcement on Friday.
“But for growth-focused investors, things aren’t so rosy,” Bell said.
While Australia boasts a healthy handful of growth stocks, the research lead said the likes of REA Group and Technology One, despite their great prospects, trade at valuations significantly above similar quality companies across the pond.
Coupled with an increasing number of Australian companies opting to stay private as opposed to pursuing an IPO route, its slim picking for fair value Australian companies.
“Homegrown heroes such as Atlassian are listing overseas, while others like Sydney Airport are being acquired by industry super funds and delisted, or worse, essentially stolen in the case of James Hardie, with shareholders unable to do anything about it,” Bell added.
“Many of the huge winners on the ASX over the past two decades, like Macquarie Group, are also maturing and their profit growth is slowing. Perhaps that explains CSL’s lousy acquisition of Vifor, which has smashed the company’s profitability as measured by return on equity.
“The extreme pricing of large growth stocks has forced us to own a handful of stocks whose best days are well behind them, such as BHP and Woolworths. Hardly the names you think of when you’re investing for growth.”
The fund’s recent underperformance, he said, is less about stock picking and more to do with “irrational exuberance”.
“We know what happens when we buy lower quality businesses.”
While InvestSMART suspects the fund’s performance will recover, once said exuberance for banks and large growth stocks cools, long-term performance still faces an uphill battle, particularly as it goes toe to toe with its index counterparts in the investment arena.
In the case of index-tracking funds, Bell noted that these strategies tend to distort the price of quality growth stocks as they “don’t care what price they pay”, particularly as it relates to Australia’s largest and safest blue chips.
“Even yesterday’s heroes like Commonwealth Bank are trading at ridiculous levels,” he said. “If we were satisfied with average returns, this wouldn’t be an issue. We are not.”
Ultimately, InvestSMART ruled out increasing the position sizes of its holdings, holding more cash, or sacrificing the fund’s ethos – quality – as a means to counteract underperformance.
Instead, from 1 July, the company is changing the fund’s product disclosure statement to allow up to 30 per cent of the strategy to be in overseas-listed stocks, chiefly in the US.
“Adding a handful of the world’s best businesses to the portfolio requires little extra work and potentially increases the return of the fund while reducing the risks. This is what successful investing is all about,” Bell said.
“Most importantly, it gives us the best chance of maintaining our outperformance over the decades ahead. This is especially true as more overseas companies devour our local heroes and the US remains the world’s leading source of innovation and investment opportunities.”
And while investors remain wary of investing abroad, especially under a Trump presidency, Bell revealed that much of the revenue from the fund’s holdings is already founded offshore, with the likes of its healthcare company exposures and Auckland Airport being leading examples
“Being able to select a small number of international stocks from our Select Value Share Fund increases the opportunity pool and allows these investments to compound at high rates over the long term with minimal turnover designed to avoid tax events that interrupt or slow the compounding of your returns.”
“This fund will remain a collection of Australia’s best growth stocks plus a handful of the world’s best opportunities … Being able to continue to perform at a high level is our primary consideration and this change, we believe, offers us the best chance of doing so.”
